Patrick T.

Gibbons
Jefferson Smurfit Professor
of Strategic Management

What is strategy?

Environmental Analysis
Analysis is the

critical starting point of

strategic thinking
Kenichi Ohmae

Environmental Scanning

3-4

From
From Environmental
Environmental Analysis
Analysis to
to Industry
Industry
Analysis
Analysis
The national/
international
economy

Technology

Government
& Politics

The natural
environment

THE INDUSTRY
ENVIRONMENT
Suppliers
Competitors
Customers

Demographic
structure

Social
Socialstructure
structure

The Industry Environment lies at the core of the Macro Environment.

The Macro Environment impacts the firm through its effect on the Industry
Environment.
2010 Robert M. Grant
www.contemporarystrategyanalysis.com

Profitability
Profitability of
of US
US Industries
Industries
(selected
(selectedindustries
industriesonly)
only)

Median return on equity (%), 1999-2007

HIGH PROFITABILITY

LOW PROFITABILITY

Household & Personal Products

26.0

Motor Vehicles & Parts

9.3

Pharmaceuticals

21.0

Insurance Life & Health

9.1

Petroleum

20.1

Forest & Paper Products

7.3

Tobacco

21.6

Food Production

6.5

Food Consumer Products

19.5

Semiconductors & Electronic

Components

6.2

Securities and Investment Banking

18.4

Network & Communications

Equipment

5.9

Beverages

17.2

Telecommunications

5.8

Medical Products & Equipment

17.2

Entertainment

2.7

Scientific & Photographic Equip.

15.6

Airlines

(12.6
)

Commercial Banks

14.8

Computer Software

14.0

The
The Determinants
Determinants of
of Industry
Industry
Profitability
Profitability
3 key influences:
1.

The value of the product to customers

2.

The intensity of competition

3.

Relative bargaining power at different

levels within the value chain.

2010 Robert M. Grant

www.contemporarystrategyanalysis.com

Porters
Porters Five
Five Forces
Forces of
of Competition
Competition
Framework
Framework
SUPPLIERS
Bargaining power of suppliers

INDUSTRY
COMPETITORS
POTENTIAL
ENTRANTS

Threat of

Threat of
new entrants

Rivalry among
existing firms

SUBSTITUTES

substitutes

Bargaining power of buyers

BUYERS
2010 Robert M. Grant
www.contemporarystrategyanalysis.com

The
The Structural
Structural Determinants
Determinants of
of
Competition
Competition
BUYER POWER
Buyers price sensitivity
Relative bargaining
power

THREAT OF ENTRY
Capital requirements
Economies of scale
Absolute cost advantage
Product differentiation
Access to distribution
channels
Legal/ regulatory barriers
Retaliation

INDUSTRY RIVALRY

Concentration
Diversity of
competitors
Product differentiation
Excess capacity &
exit barriers
Cost conditions

SUBSTITUTE
COMPETITION
Buyers propensity
to substitute
Relative prices &
performance of
substitutes

SUPPLIER POWER

2010 Robert M. Grant

www.contemporarystrategyanalysis.com

Suppliers price
sensitivity
Relative bargaining
power

Five Forces or Six?

Introducing Complements
SUPPLIERS

SUPPLIERS

Threat of
new
entrants

Bargaining
power of
suppliers
INDUSTRY
COMPETITOR
S

The suppliers of
complements create
value for the
industry and can
exercise bargaining
power

COMPLEMEN
TS
Threat of
SUBSTITUTE
substitute
S
s

Rivalry
among
Bargaining
existing
power of
firms
buyers
BUYERS

2013 Robert M. Grant

www.contemporarystrategyanaly

10

Applying
Applying Five-Forces
Five-Forces Analysis
Analysis
Forecasting Industry Profitability

If we can forecast changes in industry

structure we can predict likely impact on
competition and profitability.
Strategic Positioning
Once we know which structural features of the
industry support profitability and which depress
profitability, we can choose a favorable positioning
within the industry.
Strategies to Improve Industry Profitability
Which of the structural variables that are depressing
profitability can we change by individual or collective
strategies?
2010 Robert M. Grant
www.contemporarystrategyanalysis.com

15

Shifting
Shifting the
the Focus
Focus of
of Strategy
Strategy Analysis:
Analysis:
From
From the
the External
External to
to the
the Internal
Internal Environment
Environment
THE FIRM

THE
INDUSTRY
ENVIRONMENT

Goals & Values

Resources &
Capabilities

STRATEGY
STRATEGY

Structure &
Systems

The
Firm-Strategy
Interface
2010 Robert M. Grant
www.contemporarystrategyanalysis.com

Competitors
Customers
Suppliers

The
Environment-Strategy
Interface
12

The
The Links
Links between
between Resources,
Resources, Capabilities
Capabilities and
and
Competitive
Competitive Advantage
Advantage
INDUSTRY KEY
SUCCESS FACTORS

COMPETITIVE
ADVANTAGE

STRATEGY
ORGANIZATIONAL
CAPABILITIES
RESOURCES

TANGIBLE

INTANGIBLE

Financial
Physical

Technology
Reputation
Culture

2010 Robert M. Grant

www.contemporarystrategyanalysis.com

HUMAN
Skills/know-how
Capacity for
communication &
collaboration
Motivation
13

Firms
Firmswith
withthe
theHighest
HighestRatios
Ratiosof
ofMarket
Marketvalue
valueto
toBook
BookValue
Value
(December
(December2006)
2006)

Company

Valuation Country
ratio

Company

Valuation
ratio

Country

Yahoo! Japan

72.0

Japan

Coca-Cola

7.8

US

Colgate-Palmolive

20.8

US

Diageo

7.4

UK

Glaxo Smith Kline

13.4

UK

3M

7.3

US

Anheuser-Busch

12.6

US

Nokia

6.7

Finland

eBay

11.2

US

Sanofi-Aventis

6.3

France

SAP

10.8

Germany

AstraZeneca

5.9

UK

Yahoo!

10.7

US

Johnson & Johnson

5.7

US

Dell Computer

10.0

US

Boeing

5.7

US

Sumitomo Mitsui Financial

8.8

Japan

Eli Lily

5.6

US

Procter & Gamble

8.4

US

Cisco Systems

5.5

US

Qualcomm

8.3

US

Roche Holding

5.5

Switz.

Schlumberger

8.2

US

LOreal

5.3

France

Unilever

8.1

Neth/UK

Altria

5.2

US

PepsiCo

8.0

US

Novartis

5.1

Switz.

2010 Robert M. Grant

www.contemporarystrategyanalysis.com

14

The
The Rent-Earning
Rent-Earning Potential
Potential
of
of resources
resources and
and Capabilities
Capabilities

THE EXTENT OF THE

COMPETITIVE ADVANTAGE
ESTABLISHED

THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY

Scarcity
Relevance
Durability

SUSTAINABILITY OF THE
COMPETITIVE
ADVANTAGE

Transferability
Replicability
Property rights

APPROPRIABILITY

Relative
bargaining power
Embeddedness

2010 Robert M. Grant

www.contemporarystrategyanalysis.com

15

Assessing
Assessing aa Companys
Companys Resources
Resources and
and Capabilities:
Capabilities:
The
The Case
Case of
of VW
VW
RESOURCES

Importance

VWs relative
strenght

CAPABILITIES

Importance

VWs Relative
Strenght

R1. Finance

C1. Product
Development

R2. Technology

C2. Purchasing

R3. Plant and

equipment

C3. Engineering

C4. Manufacturing

R4. Location

C5. Financial
Management

R5. Distribution

C6. R&D

R6. Brands

C7. Marketing and

Sales

C8. Government
Relations

C9. Strategic
Management

Both scales range from 1 to 10

(1= very low, 10= very high)
2010 Robert M. Grant
www.contemporarystrategyanalysis.com

16

Appraising
Appraising VWs
VWs Resources
Resources and
and Capabilities
Capabilities
(Hypothetical only)
10

Key Strengths

Superfluous Strengths

Relative Strength

C3
R3

C8

R1
R6

5
R4

C6

R2 C2
C5

Zone of Irrelevance

1
1

2010 Robert M. Grant

www.contemporarystrategyanalysis.com

C9

R5
C4

C1 C7

Key Weaknesses
5

Strategic Importance

10
17

Appraising
Appraising the
the Capabilities
Capabilities of
of aa Business
Business School
School
(illustrative
(illustrativeonly)
only)

IMPORTANCE
+

Superfluous
strength

+
Key strength
C9, C3, C5

C6

RELATIVE
STRENGTH

Inconsequential
weaknesses
C11, C10

C1 Student recruitment
C2 Course
development
C3Teaching
C4Student placement
C4. Alumni relations
C5 Corporate relations
C6 Research
C7 Administration
C8 Financial mgt.
C9 Marketing
C10 IT
C12 HRM

Key weaknesses
C8, C4, C2, C12,
C1, C7

2010 Robert M. Grant

www.contemporarystrategyanalysis.com

18

Amocos
Amocos Appraisal
Appraisal of
of Organizational
Organizational Capabilities
Capabilities
(illustrative
(illustrativeonly)
only)

IMPORTANCE
+

Superfluous
strength

Key strength
9, 4, 5

RELATIVE
STRENGTH

Inconsequential
weaknesses
10

Not
important
2010 Robert M. Grant
www.contemporarystrategyanalysis.com

Needed
to play

Key weaknesses
1, 2, 3, 7, 8, 11

Needed
to win

1. Effective deal
making
2. Rapid new product
development
3. Relentless cost
forms
4. Product quality
5. JV management
6. Superior EH&S
management
7. Managing culturally
diverse workforce
8. Fast decision
making
9. Customer
segmentation
10.Capture synergies
across divisions
11. Effective
procurement

19

Summary:
Summary: aa Framework
Framework for
for Analyzing
Analyzing Resources
Resources
and
and Capabilities
Capabilities
4. Develop strategy implications:
(a) In relation to strengths--How
can these
be exploited more effectively
and fully?
(b) In relation to weaknesses
--Identify opportunities to
outsourcing
activities that can be better
performed
by other
3. Appraise
the firms
resources and
organizations.
capabilities in terms of:
--How
can weaknesses
be
(a) strategic
importance
corrected
(b) relative strength
2. Explore
the linkages
through
acquiringbetween
and
resources
developing
and capabilities
resources and capabilities?
1. Identify the firms resources and
capabilities
2010 Robert M. Grant
www.contemporarystrategyanalysis.com

STRATE
GY
POTENTIAL
FOR
SUSTAINABL
E
COMPETITIV
E
CAPABILITIES
ADVANTAGE

RESOURC
ES
20

Competitive Advantage?
if your business can

produce at a lower
cost than can
competitors, or if it
can deliver more
perceived value than
competitors, or a mix
of the two then you
have a competitive
advantage.

Value Chain

Value chain involves value activities and

Activities

margin
Value activities are the distinct physical and
technological activities that a firm performs to
create value for customers
Activities usually involve people, technology,
fixed assets and information.
Primary activities are involved in the physical
creation of the product and its sale and
transfer to the buyer.
Support activities

Lafley & Martin, 2013

Five essential

questions:
What is your winning

aspiration?
Where will you play?
How will you win?
What capabilities
must be in place?
What management
systems are
required?

Source: A Playbook for Strategy, Rotman, Winter 2013

Putting Strategy in its Place

Strategic Analysis
Industry Analysis
Customer/ Marketplace Trends
Environment Forecast
Competitor Analysis
Assessment of Internal Strength,
Weaknesses and Resources.

Mission
Fundamental
Purpose
Value

Objectives
Specific
Targets

Strategy
The Central Integrated,
externally oriented
concept of how
we will achieve
our objectives.

Hendrick & Fredrickson, Nov 2001, Are you sure you have a Strategy?

Supporting
Organisational
Arrangements
Structure
Process
Symbols
Reward
People
Activities
Functional policies
and profiles

Five Major Elements of Strategy

Arenas Where will we be active?

Vehicles - How will we get there?

Which Product Category?

Which Market Segment?
Which Geographic Area?
Which Core Technologies?
Which Value Creation Stages?

Economic Logic - How will

we obtain our return?
Lower costs through scale
Advantages?
Lower costs through scale
and replication advantages?
Premium prices due to
Unmatchable services?
Premium services due to
proprietary product features?

Arenas

Internal Development?
Joint Ventures?
Licensing/ Franchising?
Acquisitions?

Vehicles

Economic
Logic
Staging

Staging What will be our speed and sequence

of moves?
Speed of Expansion?
Sequence of Initiatives
Hendrick & Fredrickson, Nov 2001, Are you sure you have a Strategy?

Differentiators

Differentiators How will we win?

Image? Price?
Customisation?
Styling?
Product Reliability?

Komatsu
What are the key characteristics of the

Chinese construction machinery market?

How would you compare Komatsus,
Caterpillars and Sanys positions in the
market?
What strategies are these firms pursuing?

Competitor Analysis